BLMN is on the Hedgeye Restaurant SHORT bias list
A general theme, we remain very cautious on casual dining business models. BLMN has underperformed the S&P 500 for the past six years, so it is not a big surprise that the company is now under activist pressure. A quick sum of the parts analysis would suggest that there is some upside if Jana can get BLMN CEO, Dave Deno, to think differently about his business model. My guess is that Mr. Deno will play nice with Jana, but in the end, there is not a lot that can be done.
On 8/30/19 Jana Partners filed a 13D on BLMN, with the stated intention of shaking things up (my words) to create shareholder value. I think Jana is right and BLMN might be undervalued, the question is, by how much.
OUTBACK
I put the value of the Outback business at between $19-$22, so with the stock trading at $18.36, the stock reflects the value of the US Outback business, and maybe a little more if you include Outback International. On the other hand, I might be too generous with my valuation for the Outback business, given the business has been in a secular decline since 2011. Since 2011, units for the Outback concept have declined 7% and are likely to fall another 3-4% over the next 5 years. On top of that, Outback operating margins are among the lowest in the industry, with little hope of improvement.
OTHER BRANDS
With the stock reflecting the value of the Outback business, management (and Jana) will need to find buyers for the balances of the other brands and hopefully get a premium price. In today’s restaurant operating environment, that is going to be very challenging. Collectively the other businesses might be worth another $5-$9 per share, but that requires a big leap of faith.
I don’t think they will have a problem finding a buyer for Fleming's (maybe worth $2.00 per share), but Bonefish in not worth much. Given the current structure of Carrabba’s, I think it is going to be nearly impossible to find a buyer for that brand. As per the BLMN 10k, “We pay royalties that range from 0.5% to 1.5% of U.S. sales on the majority of our Carrabba’s Italian Grill restaurants, pursuant to agreements we entered into with the Carrabba’s Italian Grill founders. Each Carrabba’s restaurant located outside the U.S pays a one-time lump sum fee to the Carrabba’s Founders.” What is Carrabba’s worth when you are starting out in the hole by paying founders (who are not involved in the concept) 1% of sales?
In the end I don’t think there is much to do with BLMN at these levels. The next big event will be to see how the new CEO handles Jana.
